If you have been following banking, investing, or crypto-currency over the last ten years, you may be familiar with “blockchain,” the record-keeping technology behind bitcoin. But, you may have been wondering:
- What Is Blockchain?
- What are crypto-currencies?
- How Is Blockchain And Crypto-currency Related?
Lets get down to business
What Is Blockchain?
A blockchain is a decentralized, distributed, and oftentimes public, digital ledger that is used to record transactions across many computers so that any involved record cannot be altered retroactively, without the alteration of all subsequent blocks. A blockchain database is managed autonomously using a peer-to-peer network and a distributed time-stamping server.
Blockchain was invented by a person (or group of people) using the name Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the crypto-currency “bitcoin”.The invention of the blockchain for bitcoin made it the first digital currency to solve the double-spending problem without the need of a trusted authority or central sever.
This allows blockchain participants to verify and audit transactions independently and relatively inexpensively. Such a design facilitates robust workflow where participants’ uncertainty regarding data security is marginal.
The use of a blockchain removes the characteristic of infinite reproducibility from a digital asset. It confirms that each unit of value was transferred only once, solving the long-standing problem of double spending.
The bitcoin design has inspired other applications, and blockchains that are readable by the public are widely used by crypto-currencies. Blockchain is considered as a type of payment rail. Private blockchains have been proposed for business use as well. Sources such as Computer-world called the marketing of such blockchains without a proper security model “snake oil”.
Structure of Blockchain
A blockchain structure is made up of a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a times-tamp, and transaction data.
By design, a blockchain is resistant to modification of the data, so after a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash, along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.
When that new block is added to the blockchain, it becomes publicly available for anyone to view—even you. If you take a look at Bitcoin’s blockchain, you will see that you have access to transaction data, along with information about when (“Time”), where (“Height”), and by who (“Relayed By”) the block was added to the blockchain.
When a block stores new data it is added to the blockchain. In order for a block to be added to the blockchain, however, four things must happen:
- A transaction must occur.
- That transaction must be verified.
- That transaction must be stored in a block.
- That block must be given a hash.
The blockchain network provides a secure, yet transparent way to make, record and verify any type of transaction. So blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been claimed with a blockchain.
What Are Crypto-currencies?
Crypto-currencies are digital currencies or assets designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.
Crypto-currencies use decentralized control as opposed to centralized digital currency and central banking systems.
The decentralized control of each crypto-currency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.
There are approximately 2,957 crypto-currencies being traded with a total market capitalisation of $221bn (as of October 8th 2019).
Bitcoin is generally considered the first decentralized crypto-currency. Since the release of bitcoin, over 6,000 alt-coins(alternative variants of bitcoin, or other crypto-currencies) have been created.Crypto-currencies can be sent directly between two parties via the use of private and public keys.
These transfers can be done with minimal processing fees, allowing users to avoid the steep fees charged by traditional financial institutions.
Crypto-currencies are stored in wallets similar to the banking system. Each crypto-currency has a unique wallet ID and a wallet address which can be used to receive funds. It is similar to a bank account number.Here’s an example if what a bitcoin wallet looks like,
Some of the most common crypto-currencies include bitcoin, litecoin, ethereum, dogecoin, monero, ripple, bitcoin cash and many others. Just like any normal physical currency, crypto-currencies can be traded, exchanged and even invested in. But how does one acquire a crypto-currency?
Well you can buy crypto-currency with a credit card or, in some cases, get it through a process called “mining.” Crypto-currency Mining is when a computer is used to solve a cryptographic puzzles in order to build blocks. Miners are rewarded with the crypto-currency.
Crypto-currencies are very beneficial because transactions in crypto-currencies are a one-to-one affair, taking place on a peer-to-peer networking structure that makes “cutting out the middle man” a standard practice.
This leads to greater clarity in establishing audit trails, less confusion over who should pay what to whom, and greater accountability, in that the two parties involved in a transaction each know who they are.
Another benefit is strong security. Once a crypto-currency transfer has been authorized, it can’t be reversed as in the case of the “charge-back” transactions allowed by credit card companies. This is a hedge against fraud which requires a specific agreement to be made between a buyer and seller regarding refunds in the event of a mistake or returns policy.
Finally, the strong encryption techniques employed throughout the distributed ledger (blockchain) and crypto-currency transaction processes are a safeguard against fraud and account tampering, and guarantors of consumer privacy.
Just because there’s a new currency out there does’nt mean it’s infallible. Although it’s designed to be more secure through encryption, there are still risks of using crypto-currencies.
4 Risks of Using Crypto-currencies
- Instability of Values.
- Lack of Acceptance.
- Transaction Errors.
How Is Blockchain And Crypto-currency Related?
You must have noticed in this article that the terms “blockchain” and “crypto-currency” often go together. So how is blockchain and crypto-currency related?
Blockchain is the platform which brings crypto-currencies into play. The blockchain is the technology that is serves as the distributed ledger that forms the network. This network creates the means for transacting, and enables transferring of value and information.
Blockchains serve as the basis technology, in which crypto-currencies are a part of the ecosystem. They go hand in hand, and crypto-currency is often necessary to transact on a blockchain. But without the blockchain, we would not have a means for these transactions to be recorded and transferred. At times crypto-currency can seen as tool on blockchain, in some cases serving as a resource or utility function. Other times they are used to digitize value of an asset.
Since the release of bitcoin as an open-source software in 2009, many other crypto-currencies have been created. A great innovative step that brought the use of digital currency to the fold has led to the trading, exchanging and even investing of different digital currencies thanks to the blockchain technology.